Q3 2023 Mckesson Corp Earnings Call
Billable on our website at Investor Mckesson, Dotcom and to the risk factors section of our periodic SEC filings for additional information concerning risk factors that could cause our actual results to materially differ from those in our forward looking statements.
Information about non-GAAP financial measures that we will discuss during this webcast, including a reconciliation of those measures to GAAP results can be found in today's earnings release and presentation slides.
The presentation slides also include a summary of our results for the quarter and updated guidance assumptions with that let me turn it over to Brian .
Thank you Rachel and thanks, everyone for joining us on our call. This afternoon.
Today, we reported third quarter fiscal 2023 results another quarter with solid adjusted operating profit growth.
Underscoring the significant progress we continue to make in our company.
In terms of our overall company priorities.
It also signals the continued strength and stability of our North American businesses.
As a result of our third quarter performance and business outlook, we are raising our guidance range for fiscal 2023 adjusted earnings per diluted share from $24 45 to $24 95.
To an updated range of $25 75 to.
To $26 and 15.
During today's call I'm going to highlight the progress we've made across our four strategic priorities and then I'll ask Brent to provide additional details on the financial performance in our third quarter.
As you know a few years ago, we crafted our enterprise strategy and we shared our priorities with our stakeholders. We are evolving our portfolio of capabilities and we have divested businesses that are not aligned with our strategy and we have invested both organically and through acquisitions to add to our differentiated capabilities.
We are increasing our focus on the areas, where we have deep expertise in that are central to our long term growth strategy. Our progress to date is underpinned by the execution against these important company priorities are focused on people and culture.
Intentional efforts to evolve and grow our portfolio of capabilities to advance and expand our differentiated oncology ecosystem and our Biopharma services platform and our commitment towards sustainable core growth the strength of our core distribution businesses continue to show solid growth and generate free cash flow, which.
Provides us a strong balance sheet and the ability to invest internally and externally into the business.
I'll start with our first priority.
Our focus on people and culture and.
Embedded in our daily operations as our purpose advancing health outcomes for all.
<unk> has an impact driven organization, we recognize that getting back to the community is important to our associates and we continue to provide engaging and most importantly impactful ways for team Mckesson to do exactly that.
In the third quarter, we had another successful community impact day, where nearly 13000 members of team Mckesson across North America volunteered to support nonprofits that provide food to people facing hunger.
<unk> also held its annual giving Tuesday, where team Mckesson generosity resulted in $1 $5 million in employee donations.
A portion of that matched by the Mckesson Foundation, which will ultimately be distributed to 500 local national and global charities. In addition to the progress made by our employees. The Mckesson Foundation donated more than $4 million to pharmacy schools to help increase workforce diversity and improve overall health outcomes for vulnerable.
<unk>.
These grants, which range from one to five years in duration will support various pharmacy school education and community outreach programs. The innovative students support professional development and community outreach that the Mckesson Foundation is funding through these pharmacy school partnerships will help transform patient pharmacist interactions, which we.
I believe will lead to improved health equity and patient outcomes for multiple populations in their respective areas.
Proud of our talented team and their dedication hard work and innovation enables our business to positively impact our partners our customers and our communities.
Our next priority is to evolve and grow the portfolio.
We've continued to evolve and grow our capabilities, ensuring that our capital deployment is tightly aligned with where we have the best growth opportunities. This led us to our decision to exit the European region as well as a handful of smaller businesses over the last several years, we're progressing on our plans to exit the European region and have successfully exited 11 of the <unk>.
<unk> countries, we operated and we remain committed to exploring strategic alternatives for our business in Norway, which is the only country. We have not yet divested these actions allow us to focus our resources on areas that support our long term strategy. It's provided us additional flexibility to invest internally or to look externally to expand our oncology.
<unk> in our Biopharma ecosystems.
Which aligns well with our next company priority.
We have made meaningful progress expanding our oncology and biopharma ecosystems as exemplified by the strategic investments made year to date.
Mckesson recently announced that the U S oncology network.
U S is largest oncology practice management organization has continued to expand its geographic footprint with the addition of two new practices epic care in California, and Nexus health in New Mexico. Both are now part of the U S oncology network as of January one 2023. These.
These practices offer a wide range of specialty is enabling more comprehensive care that helps ensure patients can conveniently receive the care they need in their local communities during their entire treatment and healing journey.
And we're excited by the new opportunity that our joint venture with Sarah Cannon Research Institute as well as the acquisition of Gino space, bringing to our overall oncology ecosystem I am pleased with the substantial progress we've made in the development and expansion of our oncology ecosystem. This progress supports the solid performance of the U S pharmaceutical segment.
As we further our long term growth strategies, we will continue to evaluate internal and external and internal opportunities to invest to grow and to evolve this business in.
In addition to our oncology assets and capabilities are Biopharma services platform remains another priority area of growth over the last several years, we've systematically built and acquired an ecosystem of assets to complement one chip that complement each other.
In our more valuable together that as separate Standalone solutions.
Together these assets leverage our network reach technology and clinical expertise to enable better access and affordability of medications, which ultimately improves patient outcomes and impacts real lives.
We started building this business in 2006 with the acquisition of <unk> Health, which gave us connectivity to over 50000 pharmacies, we've been able to integrate value added services right into the workflow. So that we can help their processes more seamless and give the customer the experience they need and deserve.
We then acquired cover my Meds long term partner of Mckesson in 2017. This expanded our network by providing connectivity with over 750000 providers. The integration of cover my Meds automation solution alleviate some of the friction out of the workflow providers improving overall access for the patients Rx crossroads broader.
Scale in the business that we already had a hub services and patient support program and expanded our clinical expertise across many therapeutic areas.
In 2020 recall, we brought these businesses together is prescription technology solutions. So we can migrate from providing individual offerings to a more comprehensive end to end suite of solutions. This enabled us to enhance our value proposition and to help find to get patients started on appropriate therapy more quickly.
Most recently, we acquired Rx saving solutions, which helps employers and health plans reduce prescription drug costs by utilizing its advanced analytics capabilities.
More than just price transparency it really gives members insight.
Actual guidance that can drive savings and improve health outcomes for patients.
By bringing these businesses together related cover my Meds Rx Crossroads Rx savings solutions, our Mckesson prescription technology solutions connects pharmacies providers payers and Biopharma manufacturers for really next generation patient access affordability and adherence solutions that are automated and integrated into provider workflows.
Some of my Meds now processes, approximately 21 billion pharmacy transactions annually on behalf of patients to support medication access and affordability.
We continue to build and invest in innovative products that allow mckesson to provide unique insights and capabilities to our customers and these investment dollars are reflected in our results in the segment year to date as well as in our fiscal 2023 outlook during.
During the third quarter, we continued to organically invest in this segment as we position our products and services for sustainable long term growth.
The investments have enabled us to expand the network and connectivity develop new solutions that meet the growing demands of our customers.
We continue to invest and grow the platform. We're also always assessing opportunities to evolve and streamline the portfolio to ensure our resources and investments are focused on the products that bring the most value to patients.
This business saw substantial momentum coming out of COVID-19 pandemic as our Biopharma manufacturers continue to bring more brands to our platform and prescription utilization utilization trends continue to improve these factors led to strong adjusted operating profit growth in this segment in recent fiscal years.
We remain confident in the overall trajectory in this segment in our financial target of 11% growth and we will continue to reinvest profit into this business to accelerate this business over the long term.
The investments made in oncology and Biopharma ecosystems have been possible largely due to the long standing growth and our sustainable core distribution businesses, which are our <unk> company priority as we exit the European region, we've been able to focus our efforts on our North American businesses. Our teams are continuously evaluating how to drive efficiencies in our.
Core operations, whether that's leveraging a more modernized platform that allows us to act with more speed and agility or ensuring we have the optimal talent and resources to help these businesses succeed the fundamentals of our U S pharmaceutical and medical surgical solutions segment remained strong the work the team Mckesson has done to streamline.
<unk> and efficiencies combined with positive prescription volume and patient utilization trends.
Reinforces our confidence in our long term growth targets for our North American distribution businesses.
In the U S pharmaceutical business I'm excited to announce that our contract to extend our pharmaceutical distribution partnership with Cvs health through June of 2027 has been finalized.
Our long standing partnership with CVI Cvs further exemplifies the value of our scaled distribution capabilities.
The performance of the core operations and our North American distribution business enabled strong cash flow generation. That's allowed mckesson to continue to innovate and become a leading diversified healthcare services company. We believe we've made significant strides against our strategic priorities to focus on our people and culture to grow and evolve the business to invest in our own.
Apologies and Biopharma services ecosystems underpinned by the sustainable core growth in our distribution businesses.
Let me shift gears, just a bit Mckesson has also made progress recently to address environmental sustainability.
In January Mckesson received approval by the science based targets initiative for its near term climate change targets that contribute to reducing its greenhouse gas emissions are S. PCI target serve as another example of our commitment to sustainability and our response to climate change, we look forward to leveraging the advancements and climate related technologies.
That will address these environmental challenges, while also enhancing our business and helping to fulfill our company purpose of advancing health outcomes for all.
We'll of course continue to provide updates on our progress to.
To stakeholders on these targets as well as our ongoing ESG related initiatives on future calls.
As an organization, we're also committed to advancing diversity equity and inclusion.
The Captain was recently recognized by Newsweek as one of America's greatest workplaces for diversity in 2023.
We're quite honored that Newsweek recognizes mckesson's ongoing efforts to be a more diverse and inclusive employer.
Let me wrap things up we.
We're pleased with our solid results in the third quarter as we delivered on our growth strategy and as a diversified healthcare services company mckesson's talented employees.
<unk> to demonstrate exceptional performance and our third quarter results reflect their dedication and our execution together as a team and a dynamic operating environment. It also highlights the resiliency of our portfolio of businesses and solutions.
You all for your time with that I'm going to toss it over to you for additional comments on the financial results.
Well, thank you, Brian and good afternoon, everyone.
Our solid fiscal third quarter financial results reflect continued strong execution and momentum advancing our company priorities and.
In the fiscal third quarter, we delivered solid growth across our North American segments led by strong performance in the U S pharmaceutical and medical surgical solutions segments, and we continue to evolve and grow our diversified portfolio through focused and strategic investments in oncology and Biopharma services.
As a result of our solid financial performance and confidence in the underlying business, we are increasing and narrowing our full year outlook for fiscal 2023 adjusted earnings per diluted share to a range of $25 75.
$26 15.
Before I provide more details on our third quarter fiscal 2023 non-GAAP adjusted results.
I wanted to point out two items that impacted our GAAP only results in the quarter.
First we received proceeds of $129 million.
Related to our share of an antitrust class action settlement, we recognize the gain within cost of sales in the third quarter.
Second we recognized a pretax gain of $97 million from the termination of fixed interest rate swaps. This gain is included under other income in the third quarter.
Let's move now to review of our third quarter non-GAAP adjusted results on a year over year basis.
Solidago revenues of $70 5 billion increased 3% driven by growth in the U S. Pharmaceutical segment, resulting from increased specialty product volumes, including retail national account customers, partially offset by lower revenues in the international segment, resulting from the completed divestitures of Mckesson's European businesses.
Excluding the impact of our European business operations, including completed divestitures revenues increased 11%.
Gross profit was $3 billion for the quarter, a decrease of 10% excluding.
Excluding the impact of our European business operations and completed divestitures gross profit increased 7%, primarily a result of growth in the U S pharmaceutical segment.
Operating expenses in the quarter decreased 14% largely driven by completed European divestitures in the international segment.
Excluding the impact of our European business operations, including the completed divestitures operating expenses increased 9%.
Operating profit was $1 4 billion an increase of 9%.
Driven by a pre tax benefit of $126 million.
Related to the early termination of the tax receivable agreement or TRA with change healthcare.
And due to growth across the North American businesses led by the strong performance in the U S pharmaceutical segment.
As a reminder, Mckesson was a party to a TRA entered as part of the formation of the joint venture with <unk> Health care under the terms of the TRA change with generally required payment test and a portion of net tax savings, resulting from amortization by the joint venture.
In October of 2022 change exercised its right to terminate the agreement and paid mckesson to $126 million.
Consistent with our prior practice recognizing similar items. This benefit is reflected in other income in both our GAAP and adjusted operating results in the quarter.
Moving below the line interest expense increased to $69 million in the quarter, primarily due to higher interest rates and unfavorable impacts in our derivative portfolio as we exit the European region.
And the effective tax rate was 23, 4% for the quarter.
As a reminder, our effective tax rate can vary quarter to quarter, driven by our mix of income and the timing of discrete tax items for the full year. We continue to expect an adjusted effective tax rate in the range of 18% to 20%.
Wrapping up our consolidated results.
Third quarter diluted weighted average shares outstanding was approximately $141 million, a decrease of 8% resulting from share repurchase activity.
Overall third quarter adjusted earnings per diluted share was $6 90.
An increase of 12% compared to the prior year.
When excluding the impact from COVID-19 related items and the benefit from the early termination of the tax receivable agreement between adjusted earnings per diluted share increased 6%.
Moving now to our third quarter segment results, which can be found on slides seven through 12, and starting with U S. Pharmaceutical where revenues were $61 9 billion, an increase of 13% year over year, resulting from increased volume of specialty products included including higher volume from retail national account customers.
Branded pharmaceutical price increases and strengthening college, which included increased patient visits partially offset by branded to generic conversions.
Operating profit increased 6% to $778 million.
Our contract with U S government for COVID-19 vaccine distribution provided a benefit of approximately 25 per share in the quarter compared to 26 per share in the third quarter of fiscal 2022.
When excluding the impact of COVID-19 vaccine distribution U S. Pharmaceutical segment delivered operating profit growth of 7% driven by growth in distribution of specialty products to providers and health systems contributions from our generics programs and improvements in pharmaceutical prescription volumes and oncology visits.
In the prescription technology solutions segment revenues were $1 1 billion, an increase of 9% year over year, driven by increased prescription volumes faster growth in our third party logistics business and higher technology service revenues.
Operating profit increased 7% to $155 million driven by growth in access affordability and adherence solutions, partially offset by continued organic investments as we position our products and services for sustainable long term growth.
Next moving on to medical surgical solutions revenues were $3 billion, a decrease of 3% lower volumes of COVID-19 tests, and kitting storage and distribution of ancillary supplies for the U S. Government's COVID-19 vaccine program, partially offset the growth in the primary care business.
Operating profit increased 2% to $336 million.
The contribution from COVID-19 tests, and our contract with the U S government for the kitting storage and distribution of ancillary supplies.
Provided a total benefit of approximately 38 per share in the quarter as compared to 57 per share in the third quarter of fiscal 2022.
Excluding the impact of Covid related items, the medical surgical solutions segment delivered operating profit growth of 25% driven.
Driven by growth in the primary care business and favorable sourcing activities, which partially offset lower volumes of COVID-19 tests and lower contribution from kidney storage and distribution of ancillary supplies from U S. Government's COVID-19 vaccine program.
Next let me address our international results revenues were $4 4 billion.
And operating profit was $143 million a decrease of 36%.
On an FX adjusted basis revenues were $4 9 billion, a decrease of 48% and operating profit was $158 million a decrease of 29%.
Third quarter results reflect a year over year effects from the divestiture of the European businesses.
Moving next to corporate.
Corporate expenses were $19 million decrease of 88% year over year, driven by the early termination of the tax receivable agreement with change healthcare and lower opioid related litigation expenses.
Excluding the benefit from the early termination of the tax receivable agreement corporate expenses decreased 9%.
Additionally, we incurred opioid related litigation expenses of $9 million in the third quarter, and we anticipate that fiscal 2023 opioid related litigation expenses will be approximately $50 million.
Turning now to our cash position, which can be found on slide 13.
As a reminder, our cash position working capital metrics, and resulting cash flows can each be impacted by timing and vary from quarter to quarter.
We ended the quarter with $2 $8 billion in cash and cash equivalents during.
During the first nine months of the fiscal year, we made $376 million of capital expenditures, which includes investments in distribution center capacity automation and regulatory enhancements and investments in technology data and analytics to support our growth priorities, including our oncology and Biopharma services ecosystems.
For the first nine months of fiscal 2023, and 2022, we had free cash flow of one five and $1 2 billion respectively.
During the quarter, we allocated $833 million towards M&A activities.
The joint venture with the Cherokee and the Research Institute and the acquisition of Rx savings solutions.
We also returned $2 $1 billion to shareholders, including $2 billion of share repurchases.
Year to date, we returned $3 7 billion of cash to shareholders, which included $3 5 billion of share repurchases and $216 million in dividend payments at.
At the end of our fiscal third quarter, we had $3 8 billion remaining on our share repurchase authorization.
Let me turn to our fiscal 2023 outlook.
Full list of our assumptions can be found on slides 15 through 18, and a supplemental slide presentation.
I'll begin with our consolidated outlook.
Our revised guidance assumes 3% to 7% revenue growth and 2% to 6% operating profit growth as compared to fiscal 2022.
Our guidance includes $2 30 to $2 50.
The contribution attributable to the following four items.
70 to 80.
Related to the U S government's vaccine distribution in our U S pharmaceutical segment.
The dollar 10 to $1 20 related to COVID-19 tests, and the kitting storage and distribution of ancillary supplies into medical surgical solutions segment.
Approximately 15.
Related to year to date net losses associated with Mckesson ventures equity investments.
And 65 benefit related to the early termination of the tax receivable agreement, which means healthcare.
As a reminder, our contracts with the U S government for the distribution of Covid, 19 vaccine, indicating storage and distribution of ancillary supplies.
<unk> through July of 2023.
We anticipate corporate expenses in the range of 435% to $475 million, which includes net losses associated with testing ventures equity investments, which recorded in the first three quarters in the fiscal year and the benefit from the early termination of the tax receivable agreement with change healthcare, which was recognized.
In the third quarter.
As a reminder, our practice has been and will continue to not include Crescent ventures portfolio estimates in our guidance.
When excluding the impacts from COVID-19 related items net gains and losses associated with Mckesson ventures equity investments and the benefit from the early termination of the tax receivable agreement with change healthcare, we anticipate operating profit to increase 7% to 11% above the previous operating profit growth.
Target.
Moving below the line, we anticipate interest expense to be in the range of $245 million to $255 million the increase compared to the prior guidance reflects the higher interest rate environment or.
Our anticipated full year effective tax rate of approximately 18% to 20% remains unchanged.
Based on our third quarter results and our outlook for the fiscal year, we're increasing and narrowing our guidance range for adjusted earnings per share to $25 75, and $26 15.
From the previous range of $24 45 to $24 95.
When excluding the impacts of COVID-19 related items net gains and losses from the test and ventures equity investments for both fiscal 2023 guidance in fiscal 2022 results.
And the fiscal 2020.
From the early termination of the tax receivable agreement with change healthcare.
Our adjusted earnings per diluted share guidance indicates approximately 13% to 16% growth over the prior year.
Moving now to the segment outlook for fiscal 2023.
In the U S. Pharmaceutical segment, we anticipate reported revenue to increase 12% to 15% and operating profit to increase 5% to 8%.
As I outlined earlier, our outlook includes approximately 70 to 80 relate.
Related to COVID-19 vaccine distribution for the U S government.
When excluding the impact of COVID-19 vaccine distributions for the U S government.
We anticipate 7% to 9% operating profit growth.
We are pleased with the momentum of this segment, our pharmaceutical distribution business continues to deliver stable growth through focused execution and operational excellence. Let me highlight a few of the factors that are leading to the strong segment performance.
First we've observed stable prescription utilization growth, which underpins the momentum in our health system and retail offerings.
Second we maintain a favorable outlook for our oncology platform, which we see delivering higher growth and higher margin contributions.
We continue to execute invest against our oncology strategy as Brian touched on earlier, we continue to add practices and providers through our scale and growing U S. Oncology network and we are well positioned to capture increased oncology volumes.
Third we are a scaled and efficient generic sourcing operation delivering stability of supply and low cost products for our customers and patients.
And specific to fiscal 2023 through the month of January we observe brand pharmaceutical pricing that was modestly above our expectations.
For fiscal 2023 results benefit from this modest increase I would make the following two comments first.
First the impact from higher branded pharmaceutical pricing remains less material now than historically is more than 95% of our manufacturer contracts are now on a fixed fee for service arrangement and.
And second we would not anticipate this modest benefit to repeat in future years.
Our U S. Pharmaceutical segment is well positioned and has exhibited strong performance leading to an increased fiscal 2023 growth outlook.
As a result of our execution and the factors that I've. Just noted we anticipate that this segment will now grow above the 4% earnings growth target rate that we previously provided including at our 2021 Investor day.
The products and services within the prescription technology solutions segment delivered differentiated access adherence and affordability products.
We are pleased with the solid growth in both revenue and operating profit this quarter <unk>.
Biopharma services remain an important strategic growth an investment area from Catherine We're confident this segment will exhibit faster growth and higher margin.
We remain confident in our differentiated assets and capabilities we have.
Have unmatched scale across transaction provider in retail connectivity and product breadth.
Our commitment to this segment as evidenced by the investments that we've made over the past three years on average we've organically invested approximately $100 million, a year, and a new and existing products and services and.
And our recent acquisition of arc statements solutions will accelerate the breadth of capabilities, we continue to build out.
We also anticipate further organic investments in new capabilities as well as more M&A.
The internal investment pattern, the mix of technology products, and third party logistics services and the lifecycle of the products, we serve including the timing of launches.
Is opened and variability in performance quarter to quarter.
As we continue to invest and grow the business.
Anticipate that there could be charges to further integrate product portfolios and supporting infrastructure.
We anticipate delivering revenue growth of 10% to 16% and operating profit growth of 14% to 17%, which is in line with the 14% to 20% initial guidance that we communicated on our May 2022 earnings call and above the operating profit growth target of 11% provided at our Investor day event in <unk>.
'twenty one we.
We are well positioned for strong growth and we're committed to the operating growth targets that we've previously communicated.
And the medical surgical solutions segment, we anticipate reported revenues decreased 1% to 5% and operating profit to decrease 1% to 4%.
As previously mentioned our outlook includes approximately $1 10 to $1 20 related to COVID-19 tests, and the kitting storage and distribution of ancillary supplies for the U S government.
Excluding the impact of COVID-19 related items.
Anticipate medical surgical operating profit to increase 12% to 15%.
Finally in the International segment, we anticipate revenues to decline by 42% to 46% and operating profit to decline by 26% to 29%.
This year over year decrease includes the loss of operating profit contribution from businesses and transactions that we've closed to date.
For fiscal 2023, we anticipate our European operations will contribute to operating profit of approximately 90% to 95 per diluted share primarily in the first nine months of the fiscal year. This.
This includes year to date contributions from operations prior to completed sales or operations in Norway, and the contribution resulting for held for sale accounting for the transaction of the Phoenix Group.
Let me conclude our outlook with a review of cash flow and capital deployment.
We continue to anticipate free cash flow of approximately three 2% to $3 6 billion.
Which is net of property acquisitions and capitalized software expenses.
In fiscal 2023, our cash flows have also been impacted by European divestiture activities and other transactions.
As discussed last quarter, our free cash flow guidance includes approximately $900 million of negative impacts from our European operations and divested assets.
We remain committed to be good stewards of capital for our shareholders. We have and will continue to take a disciplined approach to capital allocation, we strategically think about capital allocation in three broad categories.
First we predict.
We prioritize growth by investing internally and through M&A we.
We are focused on accelerating our strategic growth pillars of oncology and Biopharma services. These growth platforms have differentiated asset scale and network capabilities.
Next we will continue to return capital to shareholders through a combination of our growing dividend and share repurchases and the third piece of our framework has a strong balance sheet and adequate liquidity underpinned by the maintenance of an investment grade credit rating.
Our outlook continues to incorporate plans to repurchase approximately $3 5 billion of shares which has been largely completed by the end of our fiscal third quarter.
As a result of the share repurchase activity, we estimate weighted average diluted shares outstanding to be approximately $142 million.
Let me take a moment and reflect on the fiscal 2023 outlook and our growth targets.
At our 2021 Investor Day event, we shared with you a set of growth metrics that reflect our commitment to drive continued momentum across the business segments.
Since then we've executed on our strategy and delivered operating profit growth consistently at or above the targets that we communicated on our consolidated and segment level.
Some of the business dynamics that we outlined previously to materialize the tailwind and contributed to recent growth including growth in prescription volume and patient mobility, our ability to grow through macroeconomic unpredictability and successful execution on a disciplined capital deployment strategy that focuses on growth and <unk>.
<unk> shareholder return.
More importantly, the solid performance is further demonstration of our shareholder value creation framework, we continue to be focused on profitable growth and efficient deployment of capital our 24% return on invested capital illustrates our focus on shareholder value creation.
In closing we are pleased with the results of our fiscal third quarter. We continued to deliver solid operating results from focused execution and strategic investment looking ahead, we're confident in our ability to deliver sustainable long term growth our disciplined growth strategy and financial framework. It gives us the confidence we will deliver on our operating.
Profit growth targets.
Thank you and now with that I'll turn the call over to the operator for your questions.
Thank you if you would like to signal what questions. Please press star one on your Touchtone telephone.
If you are joining us today using a speaker phone. Please make sure mute function is turned off to allow your signal to reach our equipment.
Again that is star one if you'd like to ask a question.
And our first question comes from.
Michael Cherny with Bank of America.
Good afternoon. Thank you.
Good afternoon. Thank you for taking the question Hey, everyone.
Diving into the prescription technology solutions business a bit I know it's continues to evolve in terms of the assets that you've put in place continued organic investment you make as you think about the ability to.
Can you sustain that.
Pathway of your long term growth targets, how much are you working on in terms of the dynamics of visibility within your own business not just to the street, but ensuring that on a quarter by quarter basis some of the.
I guess I'd call. It lumpiness that we've seen in the last couple of quarters can smooth itself out and how will this business evolve on that front in terms of that level of visibility and your ability to continue to convert successful sales successful organic investment into the sustained long term growth rate.
Yes.
Great question.
Let me kick it off first I'd say, we continue to be pleased with the performance of this business and we've got revenue growth.
9% year over year Aoc growth of 7% this year.
The last two years have been particularly strong for this business and what you find is as you continue to add capabilities into this business, we find opportunities for <unk>.
New ideas, new invention reinvention, sometimes re prioritization of the projects that we shared at Investor Day. We think this is a $15 billion plus.
Market opportunity and access affordability and adherence.
We see a relatively long runway and we feel pretty confident in our 11%.
Targeted growth for this segment now there are things that naturally happen in this business.
May make it I think your word was lumpy maybe that was our word that the January .
Hi.
I think things like the recovery pace of underlying prescription volumes.
The commercial success across some of the projects, we partner with to the Underachieve, our overachieve that their expectations losses exclusivity events are.
Our investments.
We made significant investments in this business over the last three years, we see continued opportunity to do that and that's not always completely smooth and I mean, the nature of those opportunities is going to be variable are our processes and make sure that we've got disciplined line of sight financial expectations and if those are prudent and good investments to make to sustain the growth in this segment long term.
Hey, Mike maybe what I would add is while we have seen a little bit of variability quarter to quarter. One of the things that is just inherent in this business and we've talked about this is the.
The annual customer verification process that we do for a lot of our customers and that usually happens in the fourth quarter, what I would say, though is that what we are pleased with if you go back to the guidance that we gave you at the beginning of the year in May.
14% to 20% the guidance that we're giving you now to finish the year is really within the bounds of that of that guidance. It's Ben.
As I said, a little bit of variable quarter to quarter, but it's really in line with the guidance that we gave at the beginning of the year and we're really pleased that while we've been investing in this business both organically and through M&A that we're seeing in this business develop above the long term target rates that we gave you at Investor day, So while we've seen a little bit a little more various.
Ability this year quarter to quarter than we may have seen historically when you look at it on an annual basis and you look at over the long term, which is how we manage the business. We're seeing this above the long term target rates that we gave and really in line with the initial guidance. We gave at the beginning of the year.
Next question please.
Next will be Lisa Gill with J P. Morgan.
Hi, great. Good afternoon, everyone, I hope everyone's safe and Texas.
Just wanted to go back to a couple of comments that you made around U S strike distribution, one would be that renewal with CBS through 2027, just want to understand if there is anything new or nuance to that relationship and then secondly, as we think about oncology within U S drug distribution.
Right I don't know that we see where Brian that made the comment that youre going to see higher growth and higher margin there.
At what point does that become big enough that that actually drives the margin or is that part of what we're seeing in the margin improvement today, just any kind of.
No.
Guardrails, you can give us around how to think about that on a go forward basis as that business continues to grow.
Sure.
Obviously.
Last quarter, we shared we had a binding LOI with Cvs would just.
Finalize that contract work Liza and we've been partnering with Cvs for a long time, we are incredibly proud to support the work they do and be affiliated with them.
I would not say that the services that we're providing is materially changed.
And so we're thrilled to have the opportunity to extend that towards 2027.
In terms of oncology I mean, we call it an ecosystem because we think it all sort of reinforces each other so as we do things like bring practices into the network that gives us more access to data, which supports oncology. It gives us more purchasing power and it supports our GPO business and so no.
We've been really pleased with the progression in the oncology business and our ability to scale out in each of those dimensions, but each piece does help to reinforce the other piece and we continue to think oncology is a very.
A large market opportunity in excess of $50 billion and that we have the assets that position us quite well to succeed in the long term here.
At least familiar what I would add what we've done over the last year or two through the development of on Tata through the partnerships with Sarah Cannon Research Institute Gino space, we're moving up the value chain and so we're leveraging the scale that we have in the U S oncology network the distribution scale with GPO scale that Brian just talked about.
We're adding more practices as Brian referenced earlier and by moving up the value chain with more scale.
We're very optimistic that that's going to add the margin over the coming years.
Next question please.
And next will be Eric Percher with Nephron research.
Thank you.
I appreciate the commentary on fiscal year 'twenty three relative to.
Our long term guidance targets I believe last year at this time, you provide a little bit of forward commentary in advance of formal guidance on the factors that might be worth keeping in mind as we all model fiscal year 'twenty four what would you call out relative to those items that and helping 'twenty three in may.
May not driving above below long term guidance next year.
Thanks for the question, Eric and I tried to address a little of that in my comments, but maybe I can capture it here I think there is a really a handful of items that we think could be impactful as we go forward.
Clearly, we talked about the stabilization of prescription transactions in patient mobility and utilization seems to be.
Quite quite stable, we saw prescription volume growth of about roughly about 5% in our third quarter. So that seems to be in line with what we've seen in the last few quarters.
Certainly biosimilar acceleration, we're going to see more biosimilars come to market. We've got just over two dozen that are on the market today more and more are coming.
Some recent announcements.
Certainly back that up I'd say, the timing and size of the growth investments that we make and really the the.
Timing of our integration some of the acquisitions that we may we can be very impactful in a positive way.
And then I think there are a handful of other items.
The trajectory of Covid, we think.
That that's going to go into the commercial pipeline here in 2023.
Our contract goes through July of 2023 doesn't mean that those services in.
Products are are going to go away so the pace and trajectory of that will certainly be impactful and we have a very strong balance sheet. We expect to continue to deploy that balance sheet and very capital accretive way, whether that's returning to shareholders or as you've seen us do here recently more towards acquisitions that are right on strategy.
And clearly we have the opportunity to invest organically as well so theres a lot of really positive things that are going on and there are some things that are there.
It could go the other way in terms of trajectory of Covid as an example, but we feel like we're really well positioned against all of those items.
And the macro.
Macro backdrop remains a bit dynamic right, we've got China opened in China closed.
Inflation, obviously workforce dynamics, we've dealt with we successfully I think contemplated that in our FY <unk> 'twenty three guidance.
Did not really assume any material impact and I think it's played out that way and we'll be thoughtful about that as we go into 'twenty four as well.
Next question please.
And next will be Charles <unk> with Cowen.
Charles Your line is open not already there.
Alright can you hear me now.
Yes.
Okay, great. Thanks, Thanks for taking the question Hey, I just wanted to touch a little bit on the medical segment. Obviously, if we back out <unk> very strong growth here and just wanted to dig a little deep to understand whats driving it I know you mentioned the primary care business, but.
But maybe you could go a little deeper into that is that a zero.
Any changes in product mix.
Or is this.
I don't think its probably volume growth per se, but nothing about your customers and their growth or our new customer wins or anything that you can kind of call out there would be helpful.
Because the 25, obviously is higher than the full year and how should we think about that maybe to Eric's question earlier about.
Thinking about <unk> 24 as well.
Go ahead, Brett you want to take it yes, I would say in the quarter. We identified that we had some strength in some of our sourcing programs and Thats really what drove above the trend that we've been seeing for the last really several years now.
At our Investor Day, we talked about a long term target rate of around 10%. We certainly are growing a little bit faster than that this year.
Certainly the volumes have been strong and obviously the sourcing programs were really a good contributor in the quarter I think as you think about going forward clearly we've given you the guidance for 'twenty, three but I would anchor you around the long term growth rates that we've seen now really for the last three to four years. It was a good growth rates good margins within.
This business and we think that the primary care business.
Is it really going to be.
Supportive of that 10% growth rate going forward.
Next question please.
And the next question will be from the line of George Hill with Deutsche Bank.
Good evening, guys and thanks for taking the question Brent.
Ask it a double check my math on this which is if I look at your guidance for the pharma segment for the full year, you're basically you have it growing 200 basis points faster for the balance of the year ex Covid.
I assume if I annualize it it's going to look like something greater than 6% versus preliminary expectations are at least going into the quarter. I guess could you talk about what's driving that at the core and can we think about kind of the sustainability of the pockets of strength you're seeing in that business. Thank you.
Yes, Thanks, George So we did raise the guidance for the full year to 7% to 9% excluding COVID-19 related items that were very pleased.
With the performance of the segment as I talked about in my comments. There is really a number of factors here, we've got stable prescription utilization as I mentioned, we start we're seeing about 5%.
Based on activity of data in the third quarter, we're certainly seeing strengthen our oncology platform and I think we just talked about some of the factors that are driving that we are adding practices and we're certainly moving up the value chain from that perspective.
We're seeing growth really stable growth in specialty providers as well as in health systems and so all of those things are performing quite well and that's also why I talked about that.
Expecting now that we're going to grow faster than our long term target growth rate that we gave you at investor day and that we have.
Reaffirm in previous quarter. So we think all of those things are really positive contributors and that's why we're seeing faster growth and we would expect faster than the 4% long term target growth rate that we gave you previously.
Next question please.
And next.
We will be Steven Valiquette with Barclays.
Okay.
Great. Thanks, Good afternoon, everyone. Thanks for taking the question.
Yes, I guess separate from all of the helpful color around the Covid profit streams are you able to comment just on how much may have been a key factor in the earnings upside in the quarter either in the pharma segment or the medical segment.
Yes, as we've talked about previously this has been a.
A stronger flu season than we've seen historically it really started in our first quarter, we talked about in our first quarter that was there was an extension of the illness season.
From our fiscal 2022.
Not a material driver to the enterprise. It certainly does drive more visits we're seeing with the illness season is driving not only vaccine test flu test kits, but also some combo kits, which is which started last year. So it's not a material driver to the enterprise. It certainly does drive.
More foot traffic and that certainly is beneficial to other products and services that we have not only in medical but in pharma.
Next question please.
And next question will be from Brian <unk> with Jefferies.
Okay.
Okay.
Hey, good afternoon, guys I guess just to follow up on <unk> question in Britain comments on the oncology side. It sounds like you guys are looking to get more aggressive with the rollout of oncology networks and it seems like there is consolidation there so as I say, a catalyst and maybe like big moves in that space.
Do you see opportunity with or should we be thinking about the Sarah cannon.
Partnership is an opportunity that could.
Bring a big chunk of new doctors into the network in the coming years or how should we be thinking about that thanks.
So oncology is clearly one of the key growth priorities, we've identified for the company and talked a lot about over the last year's end.
There are various capabilities within our oncology ecosystem distribution as an anchor a GPO or an anchor our practice management business use on clearly important and the innovation we've done around on Tata in the most recent addition of Gino space and the Sarah Cannon joint venture. So we think all of these things sort of add to our DIFM.
RNC Asian.
As to the attractiveness of Mckesson as as a service provider and a partner in this area. We've been really happy to be continuing to add to the growth of the U S. Oncology network, we do it in a very disciplined way.
We have a model that works for us and any acquired practices need to be able to operate consistent within that model, but it is clearly our actions. This last quarter indicate we will have opportunities to continue to grow and expand and.
And if we think that that that's that's part of our model and we expect to we expect that we can continue that into the future.
And we have time for one more question. Please.
Certainly that question will come from the line of a J rice with credit Suisse.
Okay.
Thanks, Hi, everyone maybe.
Maybe just to get you to expand if possible a little bit more on your comments around specialty and the development of Biosimilars.
I guess, if you look out over the next few years, we have a significant number are converting I know it depends in your business on how that drives administered today.
Alex.
<unk> received it but as to how much benefit youll derived but is there a way to talk about how you see that progressing over time and then maybe another aspect of that as we hear from a number of players there.
Expecting to put more resources behind specialty and growth can you give us a little bit of a sense of how you assess the competitive landscape at this point and your positioning.
Well.
I would start by saying that the contributions from Biosimilars has been increasing over the past years, we do think the pipeline.
<unk> holds a lot of promise it continues to strengthen and we think this could be.
Our long term opportunity really exists in front of us I mean to date Theres 40 approved Biosimilars 25 launched I guess, maybe 20 Six's account today's news on on Humira.
And the impact of those are going to really be dependent on the rates of adoption.
Things like the interchange ability.
For us clearly the channel will matter part B.
We have more services to offer them more support we can provide to those biosimilars in part B part D will be less impactful, but.
But I think we.
Continue to look at the majority of the opportunity being ahead of US I do think this market is still young and I think as people get more experience with Biosimilars, we would be hopeful that adoption rates would continue to accelerate.
But.
<unk> on things like pricing strategies at the innovator docs in the Biosimilar comes to market with so there's a lot of dynamics that I think are still playing out like they always do any young market, but we are in the very early days and we believe biosimilars will be good for our business model going forward.
Okay, well. Thank you everyone for joining our call. This evening I appreciate as always the thoughtful questions I want to thank Cary our operator for facilitating this call. Let me just wrap up by saying Mckesson delivered really good third quarter results.
And it's really driven by the continued momentum in our underlying business I am confident in our ability to consistently execute on our company priorities and drive sustainable long term growth as a diversified healthcare services company. None of this is possible without team Mckesson, so I'd like to thank everyone.
For their dedication.
Big and small actions they take every day to help our customers our partners and our patients I'm proud to be a member of and the leader of Mckesson.
Thanks again, everyone for joining our call I Hope you all have a great evening.
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